Fortescue in Talks With European Mills for Ore Sales (Update1)

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By Andrew Hobbs

April 2 (Bloomberg) -- Fortescue Metals Group Ltd., Australia’s third-largest iron-ore exporter, is in talks to sell ore to European steel mills as declining freight rates make shipping to the continent more attractive.

“We’ve got Europe ringing us up and saying can you supply us,” Executive Director Graeme Rowley told journalists at a briefing in Sydney today, disclosing only that talks are on with more than one mill. “We are negotiating right now.”

Shipping costs have slumped as economies slide into recession, forcing manufacturers to cut output and scale back raw-material purchases. Fortescue, seeking to more than double output from its Western Australian operation, sells all its production to China, the world’s biggest consumer of the ore.

Fortescue gained 1.2 percent to A$2.61 at the 4:10 p.m. Sydney time close on the Australian stock exchange. The Baltic Dry Index, a measure of shipping costs for commodities, fell 2.5 percent yesterday, a 16th straight decline and the longest streak since a 22-day drop that ended on Nov. 4.

The Baltic Dry Index collapsed last year on slumping steel demand as carmakers and builders cut orders to deal with the slowing world economy. Iron ore, a raw material for steel, is the single-biggest dry bulk cargo carried by sea, according to Drewry Shipping Consultants Ltd. in London.

Talks began last year between the world’s three biggest producers -- BHP Billiton Ltd., Cia. Vale do Rio Doce, Rio Tinto Group -- and steelmills in China and Japan to settle benchmark contract prices for the raw material for the year started yesterday.

BHP is likely to be the first to settle this year with the steel mills, Rowley said. Vale, traditionally the first, and Rio Tinto Group are unlikely to set prices this year, he said.

Steelmakers in Asia and Europe slashed production and cut jobs after the global economic slowdown curbed demand from builders and carmakers. Contract iron ore prices may drop 30 percent this year and 20 percent in 2010, Citigroup Inc. analyst Alan Heap said at a conference in Perth on March 24.

Fortescue will spend A$50 million changing its plan to increase the iron ore yield, Rowley said today.